Apple analysts are of no value to investors

Commentary: Also, love and money don’t mix

By

JohnShinal

SAN FRANCISCO (MarketWatch) — The wave of target-price cuts this week from those who get paid to follow Apple Inc.’s financials is a reminder of a valuable lesson for retail investors: When sentiment changes on a stock, the last places you’ll hear about it are in the reports of Wall Street analysts.

When I was a reporter covering Cisco Systems Inc. in the late 1990s, it was my job to talk to several analysts a day to find out the latest bit of news that might move the networking company’s share price.

If the stock moved more than 2% on any uptick in volume, I had to write a story explaining why. After dealing with that every day for about three years, I realized the overwhelming majority of analysts had no better clue than I did about what was moving Cisco’s stock.

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Based on that experience, I developed a rule that has since served me well, first as a journalist and then as an investor: If you hope to make money on a stock, you have to ignore what 90% of the analysts are saying about it.

In other words, only one in 10 analysts is informed enough (and honest enough) to be helpful. The rest are marking time, waiting to punch their tickets for the buy side of the investment-banking and asset-management business, where the big money is made.

Their collective uselessness to retail investors is due not to some flaw in their characters, but to a fundamental truth of the financial industry designed to take money from investors, not make money for them.

In the wake of the 35% plunge in Apple
AAPL, -0.87%
shares since September, if you want to know who the best Apple analysts are, go back and look for the ones who were expressing caution about the company’s growth rate when the stock was at $700.

Even today, the majority of analysts covering Apple have price targets that are nothing but ridiculous. Now that the company’s top-line growth has slowed and its margins have suffered a steep drop, most growth-fund managers are not going to be buying its shares for their portfolios.

Given that, the answer to the question of when Apple is going back to $700 is most likely never — even though its price-to-earnings growth ratio will keep value investors interested, and its hefty quarterly dividends will keep income investors happy.

Those are not the kind of investors who drive the type of momentum required to make a stock the world’s most valuable, as happened with Apple.

Another lesson

When I wrote my column this past Wednesday, just hours before Apple reported earnings, warning that Google Inc.’s
GOOG, -1.10%
results should make Apple investors fear Android-based device sales, some Apple bulls were quick to attack my motives.

That reader’s comment reminded me to share another lesson that retail investors would do well to remember: Don’t fall in love with a stock.

Nathan Mayer Rothschild, the British nobleman and investor who made a fortune in part by knowing before anyone else in early 19th-century London that Napoleon had been defeated at Waterloo, once famously advised to be a buyer of stocks when blood is running in the streets.

The past few months have shown that investors should be sellers of Apple when the streets are filled not with blood, but with eager iPhone buyers waiting in line for the next device. Or better yet, when tech reporters crowd outside San Francisco’s Moscone Center for the latest Apple product unveiling.

Reuters

Rothschild would not have been surprised that Apple stock peaked on the day in September when Chief Executive Tim Cook oversaw the launch of the iPhone 5. Nor would that surprise those who pay close attention to the smartphone market to notice that, just a few weeks later, Samsung unveiled its own new phone, one with a screen much bigger than Apple’s.

When the history of the smartphone market is written, there’s a reasonable chance that Samsung’s achievement will be remembered as a watershed event — the first time an Apple rival beat it to market with a feature that consumers were clamoring for.

Buyers around the globe have been gobbling up Samsung phones, and last year the Korean giant became the biggest maker of smartphones in the world.

The large money managers who began selling Apple stock in September clearly noticed. On the other hand, retail investors who were relying on Wall Street analyst reports for their research, or who simply stayed in love with Apple shares, did not.

Let’s hope they’ve learned these lessons the next time a large-cap tech stock doubles in price in less than a year, because no ride that good lasts forever.

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